Franchising: meaning and advantages to the franchisor and the franchisee

Meaning of franchising

Franchising is a contractual arrangement in which a business (the franchisor) grants an independent person or firm (the franchisee) the right to sell its products or services, or to use its complete business system, under the franchisor's brand name, in a specified area and for a specified period. The franchisee invests in and runs the outlet, pays an initial franchise fee and continuing royalties, and follows the franchisor's standards; the franchisor provides the brand, know-how, training and support.

There are two main types:

• product or distribution franchising, where the franchisee sells the franchisor's products (vehicle dealerships, fuel stations);
• business-format franchising, where the franchisee adopts the franchisor's whole way of doing business (food chains, schools, salons, fitness centres).

Advantages to the franchisor

1. Regular income. Franchise fees and royalties provide revenue.
2. Lower operating burden. Day-to-day staffing and running costs are the franchisee's responsibility.
3. A stronger name. Every new outlet spreads the brand and adds to its reputation, including in small towns the franchisor could not reach alone.
4. Local knowledge. Franchisees have their own money in their outlets, and they report back on what local customers want.
5. Fast growth on others' capital. The franchisee pays for the outlet, so the network grows quickly without much extra capital from the franchisor.

Advantages to the franchisee

1. Independence with support. The franchisee owns a business while drawing on the franchisor's experience.
2. Supply chain. Assured supplies of standard materials, often at lower cost.
3. Protected territory. The franchisor usually agrees not to appoint another franchisee in the same area.
4. Help to get going. Training of staff, store layout and promotion are supported by the franchisor.
5. National advertising carried out by the franchisor for the whole brand.
6. A name customers know. Business builds quickly because the brand is already trusted, and the odds of success are better.
7. Less guesswork. The franchisee joins a format that already works elsewhere, so the main risks of a new venture are known in advance.

Example. A young entrepreneur opens an outlet of a well-known tutoring brand in her town: she invests in the premises and pays a fee and royalty; the brand provides course material, teacher training and advertising. Both gain: the brand reaches a new town, and she starts with a recognised name.

Conclusion

Franchising is a partnership of complementary strengths: the franchisor's brand and system and the franchisee's capital and local effort. Its success depends on a fair agreement and on the franchisor's continued support and quality control. The franchisee, in turn, gives up some freedom: the agreement restricts how the business may be run, and the franchisor's methods have to be followed.